Violation of SEBI Act is a criminal offence

Court : SUPREME COURT OF INDIA

Brief : In September, 1991, an investment of Rs.65 crores came to be made by four subscribers, who applied for purchase of CANCIGO units floated by (Canbank Mutual Fund (hereinafter referred to as ‘CMF’), a fund created by Canara Bank. The Andhra Bank and Andhra Bank Financial Services Limited (‘ABFSL’ for short) made an investment of Rs. 33 crores. Two other transactions were made by the Sahara India and Industrial Development Bank of India (‘IDBI’ for short) worth Rs.32 crores

These two appeals under Section 10 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (hereinafter referred to as the‘Act, 1992’) are preferred by accused Nos.1 and 3 against the judgment and order dated 6th September, 2001 passed by the Special Court in Special Case No. 8 of 1994 in [RC5(BSC)/93-Bom], convicting and sentencing them.

2. The case of the prosecution, briefly, is as follows:

In September, 1991, an investment of Rs.65 crores came to be made by four subscribers, who applied for purchase of CANCIGO units floated by (Canbank Mutual Fund (hereinafter referred to as ‘CMF’), a fund created by Canara Bank. The Andhra Bank and Andhra Bank Financial Services Limited (‘ABFSL’ for short) made an investment of Rs. 33 crores. Two other transactions were made by the Sahara India and Industrial Development Bank of India (‘IDBI’ for short) worth Rs.32 crores.

3. During the said period, accused No.1-B.Raghuvir Acharya was the Trustee and General Manager, accused No.2- T.Ravi was the Fund Manager and accused No.3- Hiten P. Dalal was the approved broker of CMF.

4. Further case of the prosecution is that accused No.3 got Andhra Bank to subscribe for the CANCIGO units of Rs.11 crores and got ABFSL to subscribe for the CANCIGO units of Rs.22 crores. The above CANCIGO units worth Rs.33 crores were purchased in the name of Andhra Bank and ABFSL though the consideration amount for purchase of such units was paid by accused No.3. Accused No.3 got the CANCIGO units purchased in the name of Andhra Bank and ABFSL so as to ensure that he could claim brokerage falsely from CMF. Further, the case of the prosecution is that although the consideration of Rs.33 crores was paid by accused No.3, the brokers stamp on the applications were affixed in order to induce CMF to pay brokerage to accused No.3. The said accused No.3 applied for brokerage as a broker in the said transaction of Rs.33 crores when, in fact, he was not so appointed either by Andhra Bank or by ABFSL. The investment of Rs.33 crores came from accused No.3 for which he was not entitled to claim brokerage as he had not acted as a broker for the said transactions. Similarly, in September, 1991, accused No.3 did not procure business from Sahara India and IDBI and, yet, he claimed and received the brokerage in conspiracy with accused No.1 and accused No.2. It was alleged that accused No.3 never acted as broker in any of the aforesaid transactions but claimed and received the brokerage in conspiracy with the rest two accused.

5. All the three accused were charged for the offences of criminal conspiracy, conspiracy to commit offences of cheating/criminal breach of trust; receiving stolen property and falsification of accounts under Section 120-B, Section 420/409, Section 411, and Section 477-A of Indian Penal Code. Accused No.1 and accused No.2 being public servants were also charged for the offences of criminal misconduct under Section 13(1)(d) read with Section 13(2) of the Prevention of Corruption Act, 1988. All together 12 charges were framed jointly and severally vide Ex.3.

6. The prosecution had led evidence of 12 witnesses apart from a number of Exhibits in order to prove their case.

7. Learned Judge, Special Court, by the impugned judgment and order dated 6th September, 2001 held the accused No.1 and accused No.3 guilty and convicted and sentenced them as under:

8. During the trial the Special Court raised 30 points and determined most of them against accused No.1 – B. R. Acharya and accused No.3 – Hiten P. Dalal. The points raised against accused No.2 – T. Ravi, Fund Manager in CMF were answered in his favour and he was acquitted.

9. As against accused No.1, learned Special Court held that the prosecution proved beyond reasonable doubt that letter dated 9th March, 1992 of accused No.3 claiming brokerage was received by accused No.1; endorsement on the letter dated 9th March, 1992 is in the handwriting of accused No.1 and that by the said endorsement accused No.1 acting as the General Manager instructed accused No.2 to pay brokerage of Rs. 32.50 lakhs to accused No.3. There was criminal conspiracy between accused No.1 and accused No.3 to procure the brokerage which was not due and payable to accused No.3. Accused No.1 being the General Manager and Trustee of CMF dishonestly and fraudulently induced CMF to part with Rs.32.50 lakhs by authorizing payment of brokerage in favour of accused No.3 knowing fully well that accused No.3 had not acted as a broker in the above said transactions. Accused No.1 acted dishonestly and in breach of Exs.84 and 85 being minutes of the Board Meetings prescribing the mode of payment of brokerage, and thereby committed offence of criminal breach of trust under Section 409 of IPC. There was a criminal conspiracy in the matter of disbursement of brokerage of Rs.32.50 lakhs between accused No.1 and accused No.3 and thereby committed offence under Section 120-B of IPC read with Sections 409, 411 and 477-A of IPC. Accused No.1 thereby committed the offence of criminal misconduct under Section 13(1)(d) read with Section 13(2) of the Prevention of Corruption Act, 1988.

10. Learned counsel for accused No.1 submitted that main allegation against accused No.1 is based on presumption that the endorsement on letter dated 9th March, 1992[Ext.17(i) ] was in the handwriting of accused No.1. Such finding has been given solely on the basis of the statement of PW-5 – Rajesh Pitamberdas Mathija. Learned counsel pointed out that there exists inherent contradiction between the evidence of PW-4 and PW-5 and as PW-5 is not a competent witness under Section 47 of the Indian Evidence Act to provide evidence regarding the handwriting of accused No.1, no reliance can be made on the statement made by him. PW.5 was not familiar with the handwriting of accused No.1 in the course of his business as he was neither from the same department (CANCIGO), nor he worked under accused No.1. Moreover, PW.5 had neither seen accused No.1 writing the endorsement nor was PW.5 recipient of any correspondence himself.

11. As against accused No.3, apart from the allegation of conspiracy between accused No.1 and him, learned Special Court further held that the prosecution has proved beyond reasonable doubt that accused No.3 was not the broker in two transactions of Andhra Bank and ABFSL. It was also proved that accused No.3 did not act as a broker in the transactions of IDBI and Sahara India as well. In spite of this, accused No.3 made false representation by writing letter dated 9th March, 1992 under his own signatures claiming brokerage on the investments of Rs.65 crores knowing that he had not acted as a broker and he was not entitled to brokerage. Accused No.3 thereby induced CMF to part with payment of Rs.32.50 lakhs and thereby he committed an offence punishable under Section 411 of IPC apart from offence under Section 409 read with 120-B of IPC and 477-A of IPC.

12. Learned senior for accused No.3 contended that accused No.3 was entitled to brokerage under Rule 36 of the Scheme with respect to investment made by Andhra Bank and ABFSL. It was further contended that he was also entitled for brokerage for the investment made by IDBI and Sahara India as well. As per Rule 36 brokerage can be claimed for ‘subscribing or procuring the investment in CANCIGO’. Accused No.3 subscribed and procured the investment of Rs.65 crores including Rs.33 crores invested for Andhra Bank and ABFSL.

13. He further submitted that none of the witnesses (PW.4, 5 & 11) positively stated that accused No.3 was not entitled to brokerage on the investment made by Andhra Bank and ABFSL. The Auditors have never raised any dispute as to payment of brokerage to accused No.3. The Trustees and the Board have neither discussed nor have they repudiated the payment of brokerage made to accused No.3. The Bank, which was allegedly put to wrongful loss never filed a complaint against accused No.3. The Board never addressed any letter to accused No.3 calling upon him to explain the payment of brokerage made to him. In fact, the unequivocal stand of PW.11 is that the CMF did not raise queries with regard to the payment of brokerage on Rs.65 crores to accused No.3 possibly because they may be aware accused No.3 had procured business of Rs.65 crores.

14. It was submitted that such methodology of investment in terms of other i.e. on behalf of accused No.3 is well known in law. The fact that Andhra Bank /ABFSL had invested the said amounts on behalf of accused No.3 and the same was in the nature of a constructive trust has been accepted by this Court in the case of Canbank Financial Services v.The Custodian and others, (2004) 8 SCC 355. In the said case, this Court has held the said arrangement to be legal. In that view of the matter, the mere fact that Andhra Bank/ABFSL applied for CANCIGO units on behalf of accused No.3 does not show any sort of deception. The CMF itself has found no illegality or deception in the application by Andhra Bank/ABFSL. It is clear from the fact that the CMF has not claimed refund of the brokerage claimed by accused No.3 on the investment made by Andhra Bank /ABFSL.

15. It was also contended that none of the witnesses of the CANCIGO (PW.4, 5 and 11) have come out with a positive assertion that accused No.3 made a fraudulent and/or dishonest representation to CANCIGO which was acted upon by the institution/CMF to its detriment which caused wrongful loss. There is no evidence as to who acted on the representation made by accused No.3.

16. It was further contended that the applications of Andhra Bank and ABFSL were duly stamped and Ex.19 clearly states that the applications were on behalf of accused No.3. The Investigating Officer (hereinafter referred to as ‘IO’) has admitted, in his corss-examination that in the absence of written rule, circular or written instruction, payment of brokerage in good faith and in due course would not amount to an offence. On the other hand it was also admitted by the IO in his cross-examination that it was not the case of the prosecution that any sort of deception was practiced on the trustees and payment was made by them. The IO, therefore, submitted that “there was no question of deception of the Trustees. They have, in fact, authorized accused No.1 and 2 to deal with the funds and pursuant to which Rs.32.50 Lakhs came to be paid”.

17. In so far as IDBI and Sahara’s investments are concerned, it is contended on behalf of accused No.3 that the accused No.3 was entitled to brokerage because of the tripartite arrangement between CMF, Citibank and accused No.3. The tripartite agreement entailed accused No.3 and the Citi Bank for procuring investment for CANCIGO. CMF would lend 80% of the amount of subscription to Citi Bank @ 15% for one year and accused No.3 would get brokerage on the investment so procured. PW.11 admits that the scheme was in a financial crunch and it was only because of accused No.3 the money was infused in the financially starved scheme.

The material on record also establishes that investment by IDBI and Sahara was at the instance of Citi Bank. The witnesses examined on behalf of IDBI and the Board note Ex.84 clearly show that the said investment was brought about as a result of the efforts on part of Citi Bank. The money so infused in CANCIGO scheme was for the advantage of Citi Bank as 80% of it was available to it at a nominal rate of interest for a year.

18. The witness PW.11 in his cross-examination had admitted that CMF as a matter of fact lent 80% of the amount to Citi Bank for one year at the rate of 15% per year even when rate of interest was fluctuating between 20% to 50%. The amount given to Citi Bank over one year was 80% of entire amount i.e 80% of Rs.65 crores which included Rs.33 crores by and on behalf of the appellant.

19. According to the learned counsel for accused No.3, the said accused cannot be held guilty of cheating under Section 420 IPC. The prosecution case is that the letter Ex.17 was placed before accused No.1, who in turn made his purported endorsement and thereby committed the offence of cheating in conspiracy with accused No.2 and accused No.3. It was submitted that it was not the case of the prosecution that accused No.1 or for that matter anyone else in the CANCIGO mutual fund was cheated by accused No.3 by virtue of representation through Ex.17.

20. It is further contended that the Institution, CMF, is a juristic entity, akin to a Company and it acts through its human agencies. Therefore, for fastening criminal liability onto a Company, the criminal intent of the human agencies of the Company is imperative. The logical consequence is that if a Company/Institution is a ‘victim’ of cheating then somebody acting for/on behalf of the institution must state how and/or in what manner the institution has been cheated/put to wrongful loss.

21. It was submitted that the transactions with regard to Andhra Bank /ABFSL were considered by a three Judge Bench of this Court in the case of S. Mohan v. Central Bureau of Investigation, (2008) 7 SCC 1 wherein it was held that:

“18. It is not disputed that CANCIGO units worth Rs.33 crores were purchased by Andhra Bank or Andhra Bank Financial Services Limited by making use of the money owned by the appellant Hiten P.Dalal. These two financial institutions impliedly agreed to lend their name and allowed the appellant Hiten P. Dalal to purchase CANCIGO units in their name. It is also important to note that interest due on the CANCIGO units worth Rs.33 crores received from CBMF by Andhra Bank and Andhra Bank Financial Services Ltd. were credited to the account of the appellant Hiten P. Dalal. Therefore, it is clear for all practical purposes that the

CANCIGO units worth Rs.33 crores were purchased by the appellant Hiten P. Dalal and he transferred these units to CANFINA and CBMF did not raise any objection in respect of transfer of the CANCIGO units by the appellant Hiten P. Dalal. If at all, it was for CBMF to raise any objection but they did not raise any objection to the transfer of the CANCIGO units.

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21. So long as CANFINA has no grievance or complaint against the appellant S. Mohan that he acted contrary to their directions and accepted the CANCIGO units and paid the money to the appellant Hiten P. Dalal, no offence is made out against the appellant S. Mohan either of criminal breach of trust orconspiracy. In fact, PW.1(Mr. Kini, Executive VicePresident) has admitted that CANFINA used to regularly deal in CANCIGO units, that neither the Adult nor RBI made any remarks regarding transactions relating to CANCIGO units and all the transactions relating to CANCIGO units were in the ordinary course of business. Neither Canara Bank nor CANFINA had initiated any disciplinary proceedings against him. They have also not disputed the genuineness of the CANCIGO units which were got encashed by the appellant Hiten P. Dalal.”

22. According to learned Senior Counsel for accused No.3, the prosecution has failed to produce any evidence documentary or testimonial to make out a case of cheating against accused No.3 with respect to the Institution/CMF. There is no material to convict accused No.3 under any of the charges.